Tag Archives: retirement

Saving for Retirement – 30 Years to Go

Posted on May 9, 2012 by admin

If you still have three decades to go before you stop working, then it may be tempting to put off saving for retirement for a while yet, especially since you have so many other expenses in your life right now, like a mortgage payment, car payments, childcare expenses and college education funding for your kids. And how you save for retirement at this point will depend to some extent on how much you were able to save in your twenties . If you were fortunate (or disciplined) enough to pack away $20,000 or more into your retirement savings, then you may be able to get away with easing off on your retirement contributions for a while in order to concentrate on other things. But if you have not yet started to save for retirement, then now is the time to do so. However, saving money in IRAs and employer plans may not be all you can do to prepare for your nonworking years. Start with Your Employer If your employer offers a retirement plan of any kind like a 401(k) plan or 403(b) plan, then this is probably a good place to start your retirement plan if you haven’t already, especially if they offer any kind of matching contributions. Be sure to contribute to the Roth portion of the plan if this is available, because it will allow you to take tax-free distributions from your account at retirement (although any matching contributions will still be taxable because they can only be made on a pretax basis). Otherwise you should open a Roth IRA with a mutual fund company or investment firm that will allow you to invest in stocks or stock mutual funds (a much better alternative if you’re not a sophisticated investor). But your money needs to be growing faster than inflation over time, and equities and real estate are the only two asset classes that have consistently outpaced inflation over the decades. You may want to allocate a small portion of your portfolio into bonds or cash just for the sake of diversification, but your primary focus in your retirement savings at this point should still be growth. Look at Your Debt Retirees who don’t have to make a mortgage payment can live on a great deal less than those who do , especially if they have their mortgages completely paid off before they stop working. It may be wise to refinance to a 15 year mortgage, especially if interest rates are low, as this will save you thousands of dollars in interest payments that you can use instead to pay for education or retirement expenses. For example, if you refinance a $150,000 mortgage from a 30-year loan at 6% to a 15-year loan at 4%, then you have just saved yourself nearly $125,000 in interest over the full life of the loan (obviously, the amount saved will probably be somewhat less depending upon the amount of your mortgage that you have already paid off). If you can’t afford the payment for a shorter loan, consider refinancing for the same term and then do a biweekly mortgage, where you make 26 half-payments per year. This will shave about 8 years off of a 30-year note and about 3 ½ years off of a 15-year note. Those who do this now may even be able to pay off their home loans by the time their kids get to college. Retirement of other debt such as student loan payments and car loans can also be wise moves, because this will free up cash flow for you in the future with no investment risk. For more information on saving for retirement in your 30s, consult your financial advisor. Continue reading →

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Understanding Non-Qualified vs Qualified Retirement Plans

Posted on May 8, 2012 by admin

In the investment world there are some terms that apply to the investments themselves, and other terms that only apply to the vehicles chosen to hold those investments.  The easiest way to understand a qualified retirement plan is to think of it in terms of “qualified for tax benefits.” These rules are set by the IRS and when an account meets the specifications, it is deemed to be qualified.  Many people already have a qualified plan without even knowing it.  If you have any money in a 401(k), a traditional IRA, or a Roth IRA, you have money invested in qualified retirement plans. When money is put into most qualified plans, a person will see their taxable income reduced by the amount put into the plan (the exception of course being the Roth IRA, learn more here ).  Until the money is taken out of the qualified plan it will not be taxed.  So a person can buy and sell funds, often at substantial gains, and until they actually withdraw the money they will not be liable to pay any taxes.  The downside of these plans is the money is assessed at least a 10% penalty ( 25% in some instances ) if it is withdrawn before the age of 59.5, unless it qualifies for some of the early distribution rules .  The reason behind this rule is simply to encourage people to save for their retirement, instead of pulling the money out whenever they feel the urge. The opposite, a plan that is “non-qualified for tax benefits,” is a plan that does not meet the rules set by the IRS.  These accounts are designed for those who earn too much to put money into an individual qualified account, have maxed out their contributions, or they are accumulating money for a big purchase that will happen before they reach retirement age.  A non-qualified account can be set up as an individual account, a joint account (with a husband and wife team most often being the joint owners), or an entity account (often a trust, or an estate owning the account).  Regardless of who or why the account is set up there are some pros and cons to any non-qualified account. The biggest downfall to this type of account is that all the realized gains are taxable.  This means if a stock or fund is bought at a certain price, all the gains will be “realized” when the stock or fund is sold and those gains are locked in.  At this point they are counted as income (if it was held under one year) or long-term capital gains (if it was held over one year) and the investor will receive tax documentation to report the gains the following tax season.  All dividends and capital gains are taxed, even if they are reinvested and not taken as cash. Even though gains are added to a person’s taxes, losses are subtracted from them.  If a person has unrealized losses in their account, they can sell their holdings and get a deduction on their taxes.  More can be learned about this process here . Since these accounts are taxed as they go along, the IRS does not assess a penalty if the money is taken out before age 59 ½.  At any point a person can add to, or withdraw from the account.  There is no limit set on contributions or distributions. Finding the right investment account is important for anyone who wants to store money for the long run.  A non-qualified account might hit them with a tax burden before they want it, and a qualified account may tie up their money for too long before they need it.  However, most people who are just getting started investing can benefit from the forced discipline a qualified account will offer.  In the next article we will explore the various types of qualified retirement plans and what they can do for those planning their retirement. Continue reading →

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Saving for Retirement Using 401Ks, Traditional IRAs and Roth IRAs.

Posted on May 2, 2012 by admin

Most people will investment to help them save for retirement.  For much of the population retirement is still a long ways away.  For many people retirement may be further away than previously thought .  With a little planning now, and understanding which type of account to use, a person can make headway toward retiring when they want, with the lifestyle they desire. The most popular way to save for retirement is in a 401(k) plan.  These plans are offered by nearly all the major companies, and most people have the opportunity to invest in their company’s 401(k).  The setup process is quick and easy.  Many companies have even switched to automatic enrollment when a person starts working or becomes eligible (some companies require a minimum amount of service before allowing a person to enroll).  The employee can select how much they want to come out of each paycheck, either a dollar amount or a percentage (for 2012 a person can put in up to $17,000 with some special rules for those over 50 years old ).  The employer will often match a certain portion of what the employee decides to contribute.  The money to be invested will come out of the employee’s paycheck before taxes.  It will then grow in the plan only to be taxed when it is finally withdrawn.  As long as a person waits until after the age of 59.5 the withdrawals will only be subject to taxation at the participant’s current tax bracket.  These plans are subject to the required minimum distribution rules. While most companies will offer a 401(k) plan, there are some that offer different types of employer sponsored plans.  For those who are self-employed with no employees, the Simplified Employee Pension (SEP) IRA could be an option.  With this plan a person can put up to $50,000 (or 25% whichever is less) in 2012.  The rules are basically the same as a traditional IRA, with the catch that if there are any employees, the employer must put in the same percentage to each of the employees as he or she puts into his or her own plan.  For those with employees, a Savings Incentive Match Plan for Employees (SIMPLE) IRA may be a better choice.  With a SIMPLE IRA the employer must follow some rules for matching contributions , but otherwise the employee decides how much he or she wants to contribute, up to 100% of their salary or $11,500 whichever is less.  There are a few other more complicated employer sponsored plans out there (ESOPS, Profit Sharing Plans, Pensions, and Deferred Compensations) that are fundamentally the same: they will provide assets to be used in retirement. After a person has reached the contribution limits for their employer sponsored plan they can still set up an Individual Retirement Account (IRA).  The Roth IRA and the Traditional IRA both provide a great platform for investing money for retirement, and allow the investor tax benefits along the way. The downside of many of the retirement savings vehicles is that there are income limits or contribution limits.  For example: a married couple whose adjusted gross income is over $173,000 will not be eligible to contribute to a Roth IRA in 2012.  There are still options however.  An annuity can be utilized as a great place to store up money for retirement.  There are no income limits to open and fund an annuity, nor are there limits as to how much can be invested into one each year.  The gains in an annuity are tax deferred, and the account can either be taken in lump sums or it can be annuitized into an income stream later in life.  An annuity does not offer quite the tax benefits a qualified account offers, and the company issuing the annuity may place higher than usual fees on the investments, so any annuity contract should be entered into with caution. When it comes to saving for retirement a person will generally have either a 401k or an IRA plan, if not both, they can utilize.  But many people do not take advantage of the plans that are offered to them, and often it boils down to the fact that they simply do not understand them.  By taking just a few minutes to learn how a plan works, and realizing it is really quite simple to invest, anybody can take advantage of investing now in order to have the retirement of their dreams.  In the next article we will look at what accounts, how much, and how often a person should invest. Continue reading →

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Minimizing Brokerage Fees

Posted on April 28, 2012 by admin

While you are setting aside money for retirement, make sure that you’re not paying too much for brokerage fees.  You should be commended for saving money for your golden years; however, you don’t want to find out that you’ve been paying much more in financial advisor fees than necessary.  The fact is, saving money costs money.  Commissions and asset-based fees are the two main ways a person can pay their investment professional. Commissions Commissions , or sales charges, are the most common brokerage fees that mutual investors pay.  When a person buys a mutual fund they often pay as much as 5.75% in commissions.  Make sure you understand any commissions before you buy.  Low-cost brokers often have a lower fee schedules.  These fees cover the fees of the fund company, provide them some profit; cover the fees of the advisor, and provide them some profit.  After the money has been invested, the investor in a mutual fund pays ongoing internal expenses (industry average is about 1% annually) as well.  Many advisors are adamant that a brokerage (commission based) account is all that is necessary and nobody should have to worry about paying an advisor’s fee, their theory being buy and hold is the best way to go about saving money.  Others believe that an advisory account is the better option. Asset-Based Fees Many advisors receive compensation for advisory services .  While these types of accounts will waive the sales charges on the investments, they will charge an ongoing fee (on top of the internal expenses).  The idea is that the advisor will move money around to places where it will perform better, in doing so the rate of return will be higher and cover the extra fees.  Every investment firm is different in how much they charge, but these accounts often average a 1% annual fee depending on the amount of assets under management. There is no wrong way to go about investing.  And unfortunately these fees can rarely be avoided.  However, there are some tips on how to get minimize them. No load funds are also available.  These funds are generally index funds.  They have no active management, low internal expenses, but often do not perform as well as those that have money managers constantly watching over them . A person who is only investing for a short period of time (1 to 5 years) should look at C shares .  These shares will not have an upfront sales charge, but they will charge a higher ongoing internal expense.  For an investment that will only be held for two or three years, a person can save considerably. For those with a larger amount of assets (perhaps coming in all at once from an inheritance) would do well to invest a lot all at one.  In doing so, they will meet the mutual fund break points .  At each break point the sales charge drops, so investing a considerable sum right away can end up saving thousands of dollars. Fee based accounts can rarely have the fee waived.  In fact, often the advisor can often only discount the fee by paying the difference out of pocket.  The best way to find a great deal on an advisory account is to find a trusted advisor in your area. Saving for retirement is important.  Unfortunately there really is no way to truly get around or negotiate your way out of all the brokerage fees.  The important thing is to save consistently and minimize the fees you pay. Continue reading →

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Saving for Retirement – 10 Years to Go

Posted on April 28, 2012 by admin

If you’re only ten years from retirement, then it’s high time for you to figure out how much you will need to be saving for retirement and focus on accumulating that amount if you haven’t already done so. Time is running out on your opportunity to get any matching contributions that your employer offers for your retirement plan deferrals and to reap long-term growth in your portfolio. But there are several other issues to consider at this point as well, such as debt and college expenses for children. Fuel Your Contributions If you’ve been slacking off on your retirement contributions because of other expenses, then you should start taking advantage of the extra contributions that are allowed for those over age 50 . You can contribute an extra thousand dollars per year to a traditional or Roth IRA and also an extra $5,500 into your employer-sponsored qualified plan (in 2012). Use these concessions to beef up your retirement portfolio while you can. Evaluate Your Portfolio If you haven’t checked the performance of your retirement portfolio in a while, this is the time to take a careful look at how your money is growing. If your assets are on track to do what you want them to, then you may be wise to leave things as they are. But for many people, it is probably time to start shifting their assets out of equities and into more conservative holdings such as bonds, mortgage-backed securities and cash. Of course, you will not want to eliminate stocks from your savings completely, because you still need to have a hedge against inflation in your portfolio for some time to come. But at least half of your assets should probably be in something other than equities by the time you stop working unless you are an experienced investor who is comfortable taking more risk. Managing Debt If you still have decades to go on your mortgage, it may be wise for you to refinance to a shorter term loan if you plan on remaining in your current residence after you retire. Interest rates are at historic lows, so changing to a 15-year note may be a good idea right now , because the lower rate may offset the shorter time frame. And if you have any high-interest debt, such as credit cards or car loans that are outstanding, you should also concentrate on eliminating those before you stop working. It is much easier-and simpler-to retire when you have no debt; if you have to keep making payments on your debt after you stop working, you may be forced to live low for a long time to come. For more information on saving for retirement, visit the following links or consult your financial advisor. Continue reading →

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Building an Aggressive Investment Portfolio

Posted on April 25, 2012 by admin

For younger investors or investors that do won’t need access to their money any time soon, a more aggressive investment portfolio may be best suited their long-term needs.  This portfolio will hold more equities in it, so the volatility will be higher than one with less equity exposure and more bond holdings.  With a longer time horizon the investor can wait for the portfolio to recover from the downturns.  With a large amount of stocks in the account, it should recover as long as the investor sticks with their strategy. For example, an aggressive investment portfolio could about 80% equities and 20% fixed income.  Having the large amount of stocks in the portfolio will help the investor capture that average of 10% rate of return per year that the S&P 500 has.  Without taking the risk, and subsequently getting the better rate of return, a person would have trouble accumulating enough money to live on during retirement.  Keeping in mind the tradeoff between taking more risk and earning a better rate of return, the aggressive portfolio is near the top of the efficient frontier . While an aggressive investment portfolio contains mainly equities, it does not need to contain any individual stocks.  You want to hold equities through purchase of shares in passively-managed, low-cost mutual funds that track the S&P 500 or the Russell 2000.  You want their overall returns that come from investing in equity but you want to avoid the company-specific risk that comes along with holding individual stocks.  You don’t want to pay a mutual fund manager to see if they can beat the market when you can own the equity market return at a fraction of the cost. For a person in their 20’s or 30’s, an aggressive investment portfolio maximizes the expected return over the long-term investment horizon of 30 to 40 years.  Some young investors start with a portfolio of 100% equities and methodically invest in bonds over time.. As with any portfolio, rebalancing is important since too many equities will cause them to take more risk than they are comfortable with.  Even with an aggressive investment portfolio, it is important to make sure to rebalance though, especially in years where the stock market goes down, otherwise their portfolio may become over weighted with bonds.  This will help the investor stay on track to meet their goals. Having a plan is the best way to avoid making irrational decisions.  So for the aggressive investor, if the market goes down and their portfolio loses value, the best thing to do is to stay aggressively allocated.  Getting out and moving to safer investments will cause them to miss out on the returns that come when the market picks back up.  So in a downturn, rather than run away from equities, investors should put more into them. Getting properly allocated does not take too much work.  But it does take some attention to stay properly allocated throughout the years.  A target date fund will take away those worries.  The most important thing any investor creating an aggressive investment portfolio can do is make their plan, and stick with their plan. Continue reading →

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Should You Pay Off Your Mortgage?

Posted on April 24, 2012 by admin

For many Americans, there is no greater financial security than having their homes completely paid for. And while this is obviously a worthwhile financial goal in a general sense, there are times when paying off your mortgage may not be a wise move . There are several factors that will determine whether or not you should do this. Taxes Mortgage interest is one of the major deductions listed on Schedule A of the 1040. This expense is often what allows taxpayers to itemize deductions on their returns, and thus claim a litany of other deductions as well, such as charitable contributions, property taxes and other miscellaneous expenses. If you itemize your deductions now, consult your tax advisor to see what impact paying off your mortgage will have on your taxes. Also be certain not to take a distribution from a traditional retirement plan or IRA to pay off your mortgage, because the withdrawal will be counted as a taxable distribution. This will either greatly diminish or completely eliminate the benefit of paying off your loan. Liquidity If you have little in liquid savings, then you’re probably smarter to put your cash into a money market fund than to pay off your home. Everyone should ideally have at least three to six months’ worth of cash on hand in the bank for emergencies, so it’s not usually a good idea to forfeit that just to retire your mortgage a little sooner. Investment Return Paying off your mortgage is never a good idea if the value of your house has declined in recent years and you don’t plan on staying there for a long time to come. If you’re going to sell your house in the next few years, then you’ll need your cash to facilitate the purchase of your new home. However, when you pay off your mortgage, you are essentially “earning” the rate of interest that they are charging you on the loan, because you’re guaranteed not to have to pay that rate of interest anymore . This can improve your cash flow substantially, especially if you are earning much less on your savings that you’re paying on your mortgage. If your home loan is charging 6% and you’re getting 1% at the bank, then paying off your home loan will allow you to escape the spread on your respective rates. And paying off your loan can be a good idea in general if the value of your home is rising.  For more information on whether you should pay off your mortgage, consult your financial advisor. Continue reading →

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Building a Conservative Portfolio

Posted on April 23, 2012 by admin

When it comes to investing knowing what to do is half the battle.  But all the knowledge in the world will not do you any good if you don’t take any action.  Many people know about risk tolerance , rebalancing , places to invest, and the benefits of automated investing , we will look at just where to put money.  After this there is no excuse to sit on the sidelines any longer. Many people will take a risk tolerance questionnaire and come up in the conservative or moderately conservative allocation models.  Without knowing how to build a conservative portfolio this means nothing.  Basically speaking the more conservative an investor is, they will have less in equities (stocks) and more in fixed income (bonds).   So a conservative investor may only have about 20% of their portfolio in stocks, the other 80% will be a mixture of bonds, and other less volatile investments.  By taking less risk in their portfolio the conservative investor will naturally experience lower returns.  However, by keeping some equities, rather than going to 100% bonds, the investor will actually take less risk, and experience greater returns.  This is part of the modern portfolio theory called the efficient frontier . Every portfolio will need at least some stocks to help capture the growth the stock market experiences in good years.  In fact, during the last 30 years, the S&P 500 Index average just over 10% per year.   To offset the volatility in the stock market and provide income, a good portion of bonds should be used.  For consistent returns, there should be a mix of commodities mixed in as well.  So for those who are conservative, they will want to look at a portfolio that is 20% equities and 80% bonds.  Rather than choosing individual stocks or bonds, you want to invest in low-cost, passively-managed mutual funds that track the US stock market and the US bond market.  By getting into the right allocation, you can be comfortable your investments will work hard for you. In order to take a lot of the stress out of investing, the investor should look at using high quality mutual funds.  This means choosing a good fund company, and picking the funds that have good history and a good Morningstar rating.  Those who are investing in retirement accounts have it even easier.  Rather than go through the trouble of building their own portfolio, many mutual fund companies now offer target date funds .  The investor simply needs to pick the date closest to when he or she plans to retire, and the fund adjusts the allocation automatically. Too often, however, people put their money into a certain allocation and just leave it.  Since stocks grow at a faster pace than bonds, regular rebalancing is necessary.  This will keep the equities portion of the portfolio at 20% instead of watching it grow, moving the investor away from a conservative portfolio and closer to a balanced one. Continue reading →

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Is Your Retirement Plan On Track?

Posted on April 23, 2012 by admin

Millions of Americans worry about whether they have enough saved to get them through their declining years. The economic turbulence of the past few years has only amplified this issue, particularly for those who are at or near retirement age. And a large percentage of those who are faithfully socking money away are still unsure of whether or not they are saving enough or investing what they have correctly. The answer to this is not always black and white, but examining a few key factors can give you a general idea of how prepared you will be for retirement. How Much Have I Saved? This is the obvious place to start when analyzing your retirement preparedness. The amount that you have saved should be proportionate with your age; if you are in your twenties, then you should have at least a small retirement account or plan in place and be contributing to it on a regular basis. If you’re in your thirties, your portfolio should be a bit larger (ideally equal to perhaps a couple of years of your annual salary or compensation). By the time you reach your forties, your retirement plan should probably be in the six-figure range if you have been contributing steadily to it and haven’t experienced any long periods of unemployment. If you’re in your fifties or sixties, then your retirement plan balance should be approaching the amount that you need in order to sustain you through your nonworking years. What Should I Be Investing In? Again the answer to this question will change as you get older, although your risk tolerance will also play a role in the asset allocation of your retirement portfolio. Those in their twenties and thirties should be investing either primarily or exclusively in stocks and/or stock mutual funds in most cases, because stocks are one of only two asset classes that have historically outpaced inflation over time (the other asset class being real estate). As you get closer to your retirement, you should probably start to reallocate your savings into more conservative holdings such as corporate or treasury bonds. However, most people should always probably keep at least a portion of their nest egg in equities in order to provide a hedge against inflation. But the exact mix of assets that is right for each person will vary according to their circumstances and investment objectives. Conclusion There are many variables that must be considered when evaluating how prepared you are for retirement. Your asset allocation should match your time horizon and risk tolerance in order to achieve your investment objectives. Make time to explore what kind of retirement planning makes sense for you.  There is no one-size-fits-all retirement plan.  Smart Money provides another example of a retirement planner for you to consider.  You may also want to consult your financial advisor. Continue reading →

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Building a Balanced Portfolio

Posted on April 19, 2012 by admin

Finding the right asset allocation to create a “balanced” portfolio for your investments requires you to think about your tolerance for risk and when you will likely need to use your investments.  At its most basic, a balanced portfolio describes the percentage of your investments in equities (riskier) and bonds (less risky).  An example of a balanced portfolio could include 60% equities and 40% bonds.  The lower your tolerance for risk, the greater the percentage of bonds you’ll want in your portfolio.  Similarly, the closer you are to retirement, the greater the percentage of bonds you’ll want in your portfolio.  The theory behind it is that the equities will grow at a much more rapid pace, but the bonds will balance out the volatility and provide income.  Over time, many investors will gradually rebalance their investment portfolios out of equities into bonds as they have a lower appetite for risk and have a need for investment income in retirement. The bulk of the investment return in this portfolio over time is going to come from the equities portion.  Since much of the expected returns for a balanced portfolio will come from equities, it could very quickly get out of balance, especially in years where the stock market explodes with growth.  It is very important to monitor the portfolio to make sure the equities have not grown to 70% or 80%.  If that is the case, rebalancing it back to your portfolio goals will help ensure that you are not taking more risk than you are comfortable with. In a non-qualified account (one where the gains are taxed at the time they are realized) rebalancing could trigger a taxable event.  To prevent this, the investor should monitor the account, and rebalance by investing more money into the area that is out of balance.  For instance, if the corporate investment grade bonds only make up 22% of the portfolio, putting new money in will bring it back to the 25% where it should be. As with every portfolio it is important to use good quality funds.  Morningstar has one of the best resources available without a subscription.  Spending a few minutes on that site reading about the funds will increase any investor’s knowledge far above that of his or her peers.  Again, target date funds can take a lot of the decision making out of investing, allowing the investor to concentrate on other important things. Continue reading →

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